Uncovering Value In Tech Sector ETFs
Forward earnings expectations for the sector compared to the broader S&P 500 are attractive.
This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Gary Stringer, president and chief investment officer of Memphis, Tennessee-based Stringer Asset Management.
Our interpretation of global economic fundamentals leads us to think the global economy will continue to grow slowly, if unevenly. This should result in the global equity markets grinding higher, the upcoming election notwithstanding.
Relatively positive economic trends create opportunities for investors in areas experiencing growth that are not fully reflected in prices.
One sector that should benefit is technology, which offers an attractive relative value opportunity. In aggregate, the S&P 500 Index information technology sector is trading at a sizable discount relative to its historical 10-year average trailing price-to-earnings ratio. Meanwhile the S&P 500 Index itself is trading at a premium.
Additionally, while the forward earnings expectations for the S&P 500 Index have declined nearly 1% over the last three months, the same expectation for the information technology sector has increased 1.15%.
| CHARACTERISTICS AS OF 9/30/16 | |||
| Trailing 12mo P/E | Trailing 12mo P/E as a % of Average | 3mo % Change in Forward EPS | |
| S&P 500 Index | 20.42 | 124% | -0.76% |
| S&P 500 Information Technology Index | 21.94 | 75% | 1.15% |
| Source:Bloomberg | |||
For investors looking to add a dedicated technology sector Fund, there are several options available. The Technology Select Sector SPDR Fund (XLK) is a market-cap-weighted fund with approximately 75 holdings, mostly large-cap.
The Vanguard Information Technology Index Fund (VGT) is the second-largest tech ETF, behind XLK, and is also market-cap-weighted. VGT has a broader universe of holdings, approximately 370 different companies, and it gains exposure to some mid- and small-capitalized stocks.
Finally, the First Trust Nasdaq-100 Technology Sector Index Fund (QTEC) holds an equal-weighted portfolio of approximately 40 technology securities, for those investors who might be concerned with a large concentration in a few technology stocks, as is typical in a market-cap-weighted fund.
So far in 2016, the equal-weighted QTEC is outperforming the other two, with a 19.66% return, compared with 12.97% for XLK and 11.86% for VGT.
At the time of writing, Stringer Asset Management held QTEC among its universe of ETFs included in its suite of ETF portfolios. Stringer Asset Management is a Memphis, Tennessee-based third-party investment manager and ETF strategist. Contact Stringer at 901-800-2956 or at [email protected]. For a complete list of relevant disclosures, please click here.
